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Non-doms in the UK

Following on from the UK country profile in March’s edition of International Adviser, here is some supplemental information: the background to the special treatment of non-doms and UK C

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Following on from the UK country profile in March’s edition of International Adviser, here is some supplemental information: the background to the special treatment of non-doms and UK Chancellor Alistair Darling’s recent changes; and a helpful dos and don’ts list for foreign non-doms.

The history of non-dom treatment in the UK 1914 – 2008

Until its demise last year, Britain’s special treatment of non-doms with offshore assets had been in effect since 1914, and was considered unusually benign  among countries as large and developed as the UK. Of the other G-20 member nations, only Saudi Arabia is considered to have had as generous a tax environment for long-term non-doms.

Before 1914, no one in Britain paid any tax at all on offshore earnings unless or until they brought the money into the country, according to Gerry Brown, head of tax and trusts at Prudential International, who notes that income tax was first introduced to English citizens
in 1799, to finance the war against Napoleon.

Some  suggest the reason non-doms were spared the new tax on offshore income in 1914 was because UK didn’t want to alienate major allies, particularly the US, at a time when tensions in Europe were beginning to increase ahead of what would become World War I. 

Whatever the reason, the UK’s benign tax treatment of non-doms is often seen as having contributed to Britain’s decades-long appeal among very high net worth people who could afford to live anywhere, which is why some critics of the remittance fee still worry that the UK might have been better off leaving well enough alone. 

The announcement that the punchbowl was to be whisked away came on 9 October 2007, when Chancellor Alistair Darling unveiled a series of major changes to the rules governing Britain’s taxation of non-doms in his first Pre Budget Report for Gordon Brown. This was widely seen as a political response to an earlier  announcement of a similar plan by the Conservative Party, involving a £25,000 remittance fee rather than £30,000.

Do’s and don’ts for UK resident non-doms

•    Non-doms, says the Pru’s Leeson, should “get sound independent financial advice, not only on the actions they should take while in Britain but also from experts in their home country, particularly when preparing to return, as this is likely to impact their investment
planning,” he says. They should also “review the situation regularly”.

•    After the changes to the taxation of non-doms were announced in 2007, Maseco Financial’s Matthews says, he and partner Sellon began advising their American non-dom clients who had been overseas for seven or more years, or who were approaching that point, to sell all their money market and mutual funds ahead of the 6 April 2008 deadline, particularly if they were looking at significant gains that would attract a tax under the new rules.

That remains the Maseco stance: regular mutual funds that don’t have distributor status “just aren’t tax efficient anymore” for American expats living in Britain, Matthews explains.

Another option would be to invest in SIPPs, they say. A common pitfall UK non-doms of any nationality should avoid, they note, is buying investment property – not their own residence
in their own name either onshore or off, rather than having it held by an offshore trust.

•    UK-resident non-doms are warned to remember that even if they pay the £30,000 remittance fee, they must still pay the prevailing rate of income tax on any offshore money they bring onshore, which in the case of someone wealthy enough to pay the remittance would be 40%. “We know of at least one person this has happened to,” says  Leeson.       “They rang up and said, ‘surely this isn’t right.’ But we said, ‘Yes, afraid it is.’”

•    Although the recent changes to the tax regulations affecting non-domiciles in the UK did not affect existing rules governing inheritance tax, IHT remains a tricky area for non-doms who have been in the UK for 17 or more out of the last 20 years. Such individuals may find themselves paying as much as 40% inheritance tax on all but a portion of assets left them by their spouse – even though UK domiciled couples pay nothing.

For example, a non-dom wife in the top tax bracket, who has lived in the UK for 17 years and suddenly inherits £1.5 million from her deceased husband, would pay tax on all but the £312,000 exempted by the nil rate band, and  £55,000 covered by the inter-spouse exempt limit for non-domiciles, according to Leeson. If she had declared herself UK domiciled, she would have paid nothing.

www.hmrc.gov.uk

www.masecofinancial.com

www.thomaseggar.com

www.pruadviser.co.uk

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